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George P. Shultz, former Secretary of State under Ronald Reagan, and Secretary of the Treasury under Nixon, gives his take on a few current issues from his penthouse apartment in San Francisco, CA on Thursday June 8, 2006. Mike Kepka / THe Chronicle ** George P. Shultz (cq) MANDATORY CREDIT FOR PHOTOG AND SF CHRONICLE/ -MAGS OUT less

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George P. Shultz, former Secretary of State under Ronald Reagan, and Secretary of the Treasury under Nixon, gives his take on a few current issues from his penthouse apartment in San ... more

Photo: Mike Kepka

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THREE-TIME CABINET SECRETARY, GOP ADVISER, BUSINESS PROFESSOR / On the Record: George Shultz

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On a short list of American Renaissance men of the late 20th and early 21st centuries, George Shultz's name would inevitably appear.

Past holder of three cabinet posts under two presidents, Shultz is presently a business professor at Stanford University and a fellow in international affairs at the Hoover Institution. He also heads the economics team advising Gov. Arnold Schwarzenegger. The author or co-author of six books on economics and business, Shultz helps supply the intellectual firepower of the Republican Party's internationalist wing.

At 85, Shultz is barely pausing for breath. He's a board member at blue-chip corporations, including San Francisco's Bechtel Group. A champion of alternative fuels, he drives a Toyota Prius hybrid car around the Stanford campus, where he resides with his wife, Charlotte, when they are not in their San Francisco home.

Chronicle editors and reporters spoke with Shultz in his San Francisco digs recently, on the day he accepted another plaudit: the New Silk Road award, given yearly by the California-Asia Business Council for contributions to trans-Pacific commerce and understanding.

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Q: American business would like China to re-value its currency and de-link it from the dollar, to create a level playing field in trade. If you were secretary of state or secretary of the Treasury today, how would you engage the Chinese on this issue?

A: I think the system works best when the exchange rates move in relationship to what's going on, rather than people pegging the exchange rates. You see how quite often countries get into big trouble when they peg an exchange rate and it becomes unrealistic in terms of what's happening between the countries involved in these pegs.

We saw that in the big Asian crisis (in 1997). China has to ask itself whether it's in its interest to be pegging its rate the way it is. I think that is for them to determine. I believe we should have a very strong dialogue with China and talk it through from their point of view and ours.

Q: Is there any advice you would give to negotiators to help them understand our point of view on the evaluation of their currency?

A: Well, remember that when they have an exchange rate that makes it easy for us to buy their goods cheaply, it's a bargain. So to some extent, you have to say to yourself, "We're getting a deal here." You find that people do things that are in their interest. So, the Chinese have to think about it in terms of what their interests are, and it seems to me they're probably not getting it quite right at this point.

Q: There seems to be some divisiveness in Congress about what our best interests are. There is legislation proposed in the Senate to slap a punitive tariff of up to 27.5 percent on selected Chinese imports. Do you think it would send a strong signal, or would that backfire?

A: I think that would be a terrible thing to do. It would backfire, and all of a sudden the people who voted for it would have to confront American citizens who'll say, "Why did you just raise the price of things I'm buying by 25 percent?"

When I was in office, we worked hard on the subject of human rights, particularly the problems of human rights in the Soviet Union, particularly emigration of Russian Jews. And wherever I went, I would talk to my counterpart, Eduard Shevardnadze, and one time he said to me, "George, we might do something about some of these things you're talking about, but only if we're convinced it benefits us, not you."

So, I thought about that a lot and, with the president, we worked up a very careful presentation on the impact of the information age. We said, "Something is happening in the world that's going to change, and if you are in a closed and compartmented society, you're not going to be able to take full advantage of it. Some of these things are about allowing people to have more links and move more freely." It was a good argument, and it was one of the things that helped to bring about some changes.

Q: Do you think the same thing would work with China? Both Google and Yahoo are having trouble with the perception, at least in the United States, that they're playing by different rules there. They're censoring their Web sites. They're giving information to the government. How would you make that argument to China?

A: I think they are finding that the information gets through. I remember when President Reagan made his trip to China. He'd had some very powerful speeches in China, and they broadcast it but they took something out and people could see what they took out, and those things got more publicity than anything else. Have you ever looked at the Google site on Tiananmen Square? What the Chinese show and what Google shows here, it's just dramatic. But no one believes that the Chinese people are not aware of Tiananmen Square. They're not fooling anybody.

Q: Have there been occasions where a government has adapted a pretty liberal and open economic policy and yet tried to keep a tightly run centralized political policy?

A: That has happened quite a bit, and what takes place is that gradually the openness and freedom and the knowledge that goes with it that accompanies the economic program and makes its way into the political process, and changes the political process. That's been happening in China. It's still a repressive regime in many respects, but if you take a look at China, say, back in 1980 and now 25 years later, today it's a different place. It's a much more open place. People have much more choice of what they're doing. Now, they have automobiles all over the place instead of bikes, so they can go around and they pollute.

Q: Years ago, the Republican Party was viewed as a party of small government, of fiscal conservatism, of paying as you go. Now, there is a perception that the Republican Party is a party of big spending, of tax cuts and huge deficits. Has the Republican Party lost its way on economic policy?

A: The problem is spending. It has become too big, and I think that it's important for the Republican Party, it's important for our citizens, for the government, to get spending under control.

Q: Do you think the president could use his veto occasionally?

A: Yes, I do. He hasn't used his veto at all. If you look back, Ronald Reagan used his veto quite a bit. I think in order to get Congress disciplined, you have to use a veto.

Q: One of your successors as treasury secretary, Robert Rubin, has been sounding the alarm about the international position of the United States, that we are becoming increasingly a debtor country, that we consume hundreds of billions more than we sell to the rest of the world. We're dependent now on capital inflows and increasingly on goodwill of governments that buy our treasury debt. How do you evaluate the situation?

A: The trade imbalances basically stem from the fact that we don't save enough to truly finance all of our investments, and the result of that is that we import savings from abroad. People are delighted to invest in our country because risk-to-return here is quite good relative to almost anyplace else.

Nevertheless, from our standpoint, we'd be better off if we save more, and we finance more of our investment ourselves. I think this is likely. Other countries are basically living off of our deficit, because they have big export surpluses, and that's the way they keep their economy going. They are going to have to make adjustments, too. I think some of the gross imbalances will subside.

Q: In California, you've been the key economic adviser to the governor. In your view, has his position been wise to take a firm no- tax stand and finance the state's budget deficit through bond sales and borrowing?

A: What the governor faced when he came into office was a deficit in the operating budget of $16.5 billion -- over 20 percent of the budget. It's staggering. So, he had to come to grips with that quickly, which he did. And he's been able to do it successfully in some considerable part because he has resisted tax rate increases and, because people have had some confidence in that, the California economy has picked up again, so the revenues have come in.

He has this structural deficit down to about $2.5 billion dollars, I think, right now, and the revenues came in bigger than projected recently, and he used that excess in very considerable part not to just increase spending programs, as was done in the past, but to reduce one-time obligations of one sort or another, including a billion dollars to reduce the so-called economic recovery bonds. If you get tax rates up too high, then it cuts growth. I'd like to see spending under a little better control, myself. But anyway, right now, there's a huge amount of progress that's been made.

Q: What would be the first expenditure you would like to see brought under control?

A: Oh, I don't want to try to be the budget director. I was a budget director once. That's too tough a job.

Q: Looking back over a long period, what do you regard as your finest accomplishment?

A: Being privileged to play some part, with President Reagan's leadership, in bringing the Cold War to an end was a huge thing. But in many respects, accomplishment, for me, anyway, usually comes down to something human. I worked on the problems of people who were not allowed to emigrate. And there was one of those cases that I was bringing up, on Ida Nudel. And I kept at it. In the Soviet system, you don't know if you're ever going to get anywhere, but things did begin to break. One day I was sitting in my office and the phone rings. On the other end, "This is Ida Nudel, I'm in Jerusalem. I'm home."

Q: What wakes you up in the middle of the night worrying?

A: Oh, I don't wake up worrying in the middle of the night too much. But I think our biggest problem is radical Islam using the tactics of terror and the threat that that poses to the way our society works, the way our economy works.

There's a chart I have here, it's from the International Monetary Fund. They publish an annual global outlook. I think it's a fair statement that right now, with a shift in people's realization of what works in economic development, with the information age, that the world has never been in a more promising moment. And so, we want to take advantage of that and we don't want to have disruptions that can potentially accompany major acts of terrorism. That's one of the reasons why getting a handle on nuclear proliferation is so significant.

Q: So, Iran would be one of the top issues on all of this?

A: Iran has got to be on top of the list. North Korea has to be on the list. There are problems in this regard, and I think there are things that we should be doing. And I believe that the current administration is working to get a broad understanding of control over the (uranium) enrichment process. That is, if you can get some set places where uranium is enriched to the grade necessary for a nuclear power plant and have some international inspections so that it is not being enriched on up to weapons grade, then you could be in a position to say to any country, "If you want to have a nuclear plant, you don't have to enrich uranium, you could buy it at a reasonable price and get it."

Q: In North Korea's case, at times they say "We just want to talk to the U.S. We want one-on-one talks.' Should we do that, or is that rewarding bad behavior?

A: There are some countries that have much more clout with North Korea than we do, particularly China. So, we have to get China to be willing to take a tough stand. There's got to be a concern in China about what would happen if North Korea winds up with a nuclear weapon, because North Korea has already flown ballistic missiles over Japan. It's hard to imagine that Japan would sit still for North Korea with a nuclear weapon on the end of a ballistic missile. Japan can produce a nuclear weapon practically like that. And in China, with all of the historical background, you would think it would be your worst nightmare to have a nuclear-armed Japan. The way to avoid that is to get a grip on North Korea.

Q: What about Iraq? How can we extricate ourselves from this situation?

A: Well, the positive side of it would be that the government that is there now has been established as a result of an election and it has a legitimacy that is almost unique in that part of the world. The people that are being killed, practically all are Iraqis. If they can get it under control, gradually building an Iraqi armed force and police force to take on the duties of maintaining law and order in Iraq, then it's quite possible that Iraq could emerge as a country of reasonable civility with a representative form of government.

Q: With the benefit of hindsight, was that the wisest thing to do, to invade Iraq?

A: We didn't find the weapons of mass destruction. We did find that Saddam Hussein had in a sense, on the shelf, ready to go as soon as he got rid of the inspection regime, his weaponry program, chemical and biological weapons. Clearly, nuclear weapons are on a further horizon. We also find from examining documents that were captured from his regime and are becoming more available finally (that) he was in the process of training terrorists.

Q: Are you suggesting that he was associated with Sept. 11?

A: No, I didn't say that. But I've said our problem is that these people are being trained in how to perpetrate these terrorist acts and to develop the weaponry and all that. The stakes are very high in the Middle East. It's at kind of a tipping point now. There are more things that could happen positively, as well as negatively, in quite a while. If Iraq can become successful, it will make a huge difference -- and that is one of the reasons why there is so much effort to stop that from happening.

Q: How can we balance American principles, freedom and human rights, with the need for security?

A: The issue is when there is a war and you capture somebody who is fighting against you, then what are the appropriate conditions for holding that person? We know that under the Geneva conventions the prisoner of war is held for the duration of the war. So, there's nothing unusual about holding prisoners for a long time, waiting for the war to end.

We have a little problem here because these people are not in uniform, but they nevertheless are at war with us. I think what needs to be done is to say this is just a different case, what are the rules? At the same time, torture, whatever exactly that means, is against the rules. So, you don't do that.

I suppose you can say, what is torture, really? Where does aggressive interrogation become torture? Just where that line is, I don't know. I suppose we could return the people in Guantanamo back to the countries where they are from, but we would probably get a lot of criticism because they would get a lot worse treatment there than they are getting at Guantanamo.

Q: China wanted five Muslim dissidents in its western region back. Wasn't there a suspicion that they would be tortured once they returned to China?

A: That's my point. If you say, "Why don't we close Guantanamo?' what will we do with them? If we send them back to where they came from, some places would make Guantanamo look like a spa. What you don't want to do is take people who have been captured because they are killing Americans and others and let them loose so that they can start doing it again.

You haven't even touched on the question that you should ask about, because it's so important.

Q: I bet it's your tattoo.

A: What tattoo?

Q: There is a rumor that you have a tattoo, a Princeton tiger.

A: I have a no-confirm-or-deny policy.

Q: Well, you know how people interpret that when you neither confirm or deny.

A: That's up to them.

Q: If you did have a tiger, how big is he? Would it be in color?

A: I could not imagine.

I think you should have asked me about demography. I have been working on comparative demography for a few years now. I took a look at what's happening to Asia.

You have some countries where the birth rate is very low, longevity is high, like Japan, and the proportion of people who are 65 and older is growing rapidly. The total population is beginning to decline, as it is in Germany, as it has been in Russia for some time, as well as Italy and Spain.

Then you have some countries somewhere in the middle. China, I would put in the middle. But China is heading into one of the most interesting demographic pictures that you see anywhere, because they now have had for about two generations or so this one-child policy. China is going to look like Japan with an exclamation point. As somebody put it, will China get rich before it gets old? If it doesn't, it will have a hard time supporting the old.

Q: What's the significance of these developments?

A: Well, the significance is that economic growth is composed of how many people are working and how productively they're working. So, when the numbers of people working go down, that does something to growth. As you look at some of the countries, unless they can loosen up some of their laws, particularly in Europe, so that their productivity can increase, it's hard to see anything how anything can happen but that their standard of living goes down.

Q: You could have lived anywhere. What do you like about living here?

A: San Francisco, it's a wonderful place to live. The Bay Area, I admire. We have a home on the Stanford campus, which I have had for over 30 years. You can move around the Bay Area and pick your climate. And, it's also a stimulating environment.

When you run out Stanford, UC Berkeley, UCSF, other campuses around here, you can lay a claim that there's no intellectual environment better. I make myself somewhat a part of that, particularly at Stanford. It's really an exciting place to live. Occasionally I get to sit around with students. They are really wonderful young people. So, life is pretty good.

Q: When one of our reporters interviewed Milton Freidman, he asked him what it was like for a free-market economist to live in a city where George Bush got 7 percent of the vote. He said, "Well, there's just more work to do here." Do you feel the same?

A: Well, there's a lot of work to do, politically. I learned to pronounce Ca-LEE-for-nia (laughter). But, Arnold is doing pretty well. He's going to win re-election, I believe.

Q: Will you be stumping for him?

A: Sure. Politics is fun, particularly when you win.

Q: Come to think about that, after last year's losses on those referenda, he said, "You're going to see a new Arnold. I learned my lesson." Has he changed?

A: Well, he did from the beginning make an effort to reach out to everybody, but I think it's been stronger this time. Take the big bond issue and the infrastructure. I think he has pretty much convinced people that California has big needs.

The can has been kicked down the road too long and something has to be done about it. At first there was resistance, but then people came around and now the Legislature has joined him in putting this proposal forward. So, the chances are very good it will pass. It's being (proposed) not so much as a partisan thing, but more as "Here's something for California."